1. You take a long position in one ABC July 120 call contract for a premium of $5. You hold the option until the expiration date, when ABC stock sells for $123 per share. What is your total profit on this investment?

2. You take a long position in one XYZ July 125 call contract for a premium of $5. You hold the option until the expiration date, when XYZ stock sells for $123 per share. What is your profit on this investment on a per share basis?

3. You "go long" one ABC July 120 put contract for a premium of $3. You hold the option until the expiration date, when ABC stock sells for $123 per share. What is your total profit on this investment?

4. You short one XYZ July 120 call contract for a premium of $4. On the expiration date, XYZ stock sells for $121 per share. What is your total profit on this investment?

5. What style of option can only be exercised on the expiration date?

6. The initial maturities of most exchange-traded options are generally __________.

7. Label the following as: Obligation or right? AND, to buy or sell the underlying?

Call Holder:

Call Writer:

Put Holder:

Put Writer:

8. A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is ______________-the-money.

9. The value of a listed call option on a stock is lower when (circle all that apply):

I. The exercise price is higher

II. The contract approaches maturity

III. The stock decreases in value

IV. The volatility of the underlying stock increases

10. The price quotation for a Boeing call option with a strike price of $50, due to expire in November, is $20.80. The stock price of Boeing is $69.80. The total premium on one Boeing November 50 call contract is _________.

11. You take a long position in one IBM March 120 put contract for a put premium of $10. The maximum total profit that you could gain from this strategy is _________.

12. Suppose you go long one Texas Instruments August 75 call contract quoted at $8.50 and short one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your total profit would be _________.

13. A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to a writer of the put is __________, and the maximum per-share gain to a writer of the call is _________.

14. You short one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when IBM stock sells for $95 per share. You will realize a total profit of __________ on this.

15. An investor enters a long call at a premium of $2.50 with a strike price of $35. If the current stock price is $35.10, what is the break-even price for the investor?

16. An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12.

What is the intrinsic value of the call?

What is the time value of the call?

If the company unexpectedly announces it will pay its first-ever dividend 3 months from today, you would expect thatthe value of the call would increase, decrease, or remain unchanged?

17. Use the two-state binomial option-pricing model with continuous compounding for the following questions:

S₀ = $100; X = $120; r_f = 5.5%

The stock price will either increase to $150 (u=1.5) or decrease to $80 (d=0.8).

a) What are the call option values (C_u & C_d) across the two states?

b) What is the delta (i.e., hedge ratio) for the call?

c) What is the probability (Pr_u) that the underlying stock price will experience the 'u' state?

d) Value the call using the risk-free approach.

e) Value the call using the risk-neutral approach.

f) Given the value of the call calculated above, what is the value of a put option, according to Put-Call Parity, with the same strike price and maturity date?

g) What are the put option values (P_u & P_d) across the two states?

h) What is the delta (i.e., hedge ratio) for the put?

i) What is the probability (Pr_u) that the underlying stock price will experience the 'u' state? (Same as above)

j) Value the put using the risk-free approach.

k) Value the put using the risk neutral approach.

1. You are considering a project which has been assigned a discount rate of 8%. If you start the project today, you will incur an initial cost of $480 and will receive cash inflows of $350 a year for three years. If you wait one year to start the project, the initial cost will rise to $520 and the cash flows will increase to $385 a year for three years.

What is the value of the option to wait?

2. Wilson's Antiques is considering a project that has an initial cost today of $10,000. The project has a two-year life with cash inflows of $6,500 a year. Should Wilson's decide to wait one year to commence this project, the initial cost will increase by 5% and the cash inflows will increase to $7,500 a year.

What is the value of the option to wait if the applicable discount rate is 10%?

3. Your company is deciding when to invest in a new machine. The new machine will increase cash flow by $240,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,200,000. The cost of the machine will decline by $120,000 per year until it reaches $720,000, where it will remain. Your required return is 8%.

In which year should you purchase the machine? Why?

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